Intrajurisdictional capitalization and the incidence of the property tax

Two views dominate the debate about property tax incidence — the “capital tax” or “new” view, under which the tax distorts capital allocation and is borne primarily by capital owners, and the “benefit tax” view, under which the tax is an efficient user charge. Evidence of both interjurisdictional and intrajurisdictional capitalization of property taxes and public services has been argued to provide compelling evidence for the benefit tax view. This paper focuses on the latter — the intra-jurisdictional capitalization effects that underlie what is arguably the most plausible derivation of the benefit tax view of the property tax. The analysis provides a model in which the capital reallocations that characterize the capital tax view induce intrajurisdictional capitalization effects that are generally similar — indeed, in the benchmark case, identical — to those that arise under the benefit tax view, suggesting that empirical evidence supporting such capitalization effects cannot distinguish between the two views. In addition, the analysis shows that these capitalization effects imply that even under the stringent assumptions of the benefit view, the property tax is not a benefit tax for a property-tax-financed increase in local public services; rather, it only becomes a benefit tax for future home purchasers — after the modeled intrajurisdictional capitalization effects occur. •I examine the role of intrajurisdictional capitalization in property tax incidence.•A simple model encompasses both benefit tax and capital tax views of the tax.•Intrajurisdictional capitalization effects are identical under the two views.•Such effects thus do not distinguish between the two views, despite claims to contrary.•Results also show a primary derivation of the benefit view does not apply to tax changes.